Military giants BAE and Rolls-Royce go on a results defensive

Results from Britain's premier defence and aerospace companies, BAE Systems and Rolls-Royce, were given a mixed reception by investors yesterday.

BAE wrong-footed the market after its pension deficit mushroomed by 36 per cent to £4.5billion

Underlying profits for the first half rose 19 per cent to £979million.

Rolls-Royce was dealt a blow this week as Barack Obama said he opposed development of an alternative
engine to power the F-35 Joint Strike Fighter

But one-off charges meant the group made a declared pretax loss of
£44million compared with a profit of £791million a year ago.

That reflected a £256million writedown on the value of its US armoured vehicle maker, Armor Holdings.

The pretax figure was also skewed after accounting for inter-company loans.

BAE insisted the sharp increase in the pension shortfall was down to
volatility in the bond markets, plus raising its long-term inflation
forecasts.

The defence giant, which generates about 58 per cent of its sales
from the US, said India had now become its seventh main market along
with the UK, US, South Africa, Sweden, Australia and Saudi Arabia.

BAE chief Ian King said: 'We are very close to signing (a contract) with Mahindra & Mahindra.'

The group received approval from the Indian authorities to set up a
partnership with the vehicle maker in January. BAE will have 26 per
cent of the armoured truck joint venture.

BAE's growth over the last few years has been driven by strong sales
of armoured vehicles to the Pentagon, but these sales are likely to
slow next year.

King signalled a shift in emphasis towards fighter jet programmes,
adding: 'The Typhoon and Joint Strike Fighter will be the main drivers
for growth in the medium term.'

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A deal that secures a third tranche of deliveries to the nations
behind the mammoth Eurofighter project, including the UK, is due to be
signed today. That will add £2billion to BAE's order intake.

BAE (down 16p at 312p) raised its half-year dividend to 6.4p from 5.8p.

Meanwhile, Rolls notched up a forecast-beating 8.5 per cent rise in
underlying half-year pretax profits to £445million, and said it was on
course to meet full-year targets.

Pretax profits were £2.5billion, up from £389million a year ago, due
to a positive contribution from complex deals, known as hedges, on
foreign exchange. The interim dividend was raised 5 per cent to 6p.

Although the airline sector is in turmoil, Rolls still delivered 424
engines to customers in the half, compared with 462 a year ago.

Its flagship Civil Aerospace division clocked up revenues of
£2.3billion in the period, up from £2.1billion. Revenues relating to
engine repair and maintenance came to £1.3billion.

Rolls chief Sir John Rose said the group's broad portfolio, spanning
the civil and defence aerospace, marine, and energy sectors, was
helping it ride out the recession.

It also has a strong balance sheet, with more than £1billion of net
cash. Rolls (up 32.75p at 408p) was dealt a blow this week when US
President Barack Obama said he opposed development of an alternative
engine to power the F-35 JSF.

Rose said the tussle between Obama and project supporters in Congress was 'too close to call'.

He added: 'Clearly we would be disappointed if the alternative
engine wasn't chosen, but the scale of the project impact on us is not
material.'